Right to Win EP.6: Building an Edge in Multi-Site Healthcare with Zach Jones - EP.284

0:00I think most providers are very wary of private equity because a lot of private equity funds have come in and asked providers to produce a lot more than they had historically, you know, removed their clinical independence or just were generally not good partners. I don't think that a lot of the private equity funds or hospital systems are so focused on physician happiness, retention, and just treating them as true partners. and we have a hundred percent retention of not only the sellers, but all physicians we've hired since. And I think that really speaks to the fact that we've been able to create a really constructive, clinical partnership with them.

0:42Welcome to Think Like an Owner and the finale episode of our Right to Win episode series, covering how search entrepreneurs can develop rights to win deals, companies, new customers, big hires, and all sorts of other things. And Zach Jones joined us for this episode all about a right to win in healthcare that was really unique and well understood and well executed. And it was a ton of fun. And joining me is Aaron Perrine from Trilogy and Keith Gross from Pacific Lake to help introduce Zach. Yeah, great. Hi, Alex. Hi, Keith. I just want to say how much I appreciate and Trilogy appreciates the partnership with the podcast and with Pacific Lake on this series.

1:26It's been really fun to do. We continue to just get great reactions from folks who feel like they've got something out of it, which, of course, is the point and why we do all this. So thank you both for that. And I guess I would just kick off by saying it's been a, you know, I've had the pleasure of working with Zach and the gastro platform that he acquired and has then built. And, you know, I think people will really get a lot out of this conversation. You know, we're often starting from the perspective of somewhat generalist investors. And there's something really great about that, this real intellectual curiosity in that.

2:02I think, you know, in healthcare, it also really pays to know something about something. And I think people listening to this conversation will just appreciate the depth to which Zach, you know, understands physician compensation, physician recruitment, physician, you know, just the operational complexities of a procedure-based practice. So that was really fun to listen to from him. And I think people will enjoy here. Yeah, I agree, Aaron. It was really cool to hear Zach just talk about the same themes that embody just the way he approaches business with physicians in partnership and trust and relationship.

2:41And he just kept coming back to these themes, no matter what the topic was that Alex was hitting him with. It just came back to the same thing. Like, I wake up every day wondering how to be a good partner to my physicians. And that is, I think, true of any business, but is particularly true in healthcare and provider-based businesses. Yeah. And, you know, he didn't, it's like part of that, of course, just Zach's approach. But I think he also made the point, which as a, as a ETA investor, I appreciate that the model itself is, is structurally a really good fit for physicians looking for that kind of partnership.

3:16And, and I think that's right. I think even Keith, I think in our portfolios, like we see that over and over again, where like this, this model has been effective as long as it has, partially because of the fantastically talented operators that we bring into it, but also because it's structured for that kind of partnership. And then, you know, Zach took that and like just titrated it exactly right for the kind of provider that he's partnering with and has really set an example of how to do this in an exciting way. Yeah, I totally agree. And I think what's great is, you know, he's playing a different game and it's his game and it's the right game for him and for his partners.

3:55He's not trying to be, some ways not, he's not trying to be a PE firm. He's just trying to be a great leader and partner. And it comes through in everything he talks about. Welcome to Think Like an Honor. This podcast is all about how small businesses are grown. And Zach, thank you for joining the concluding episode in our Right to Win series. This series focuses on how search CEOs kind of identify different rights to win, whether that's a right to win a deal or a relationship with a seller or customers or new key hires or anything in between. Every episode, every CEO in the series has brought a different right to win that has been fun to digest and look through.

4:36So I'm excited to chat with you today about all things clinical. Can you walk us through your background and kind of how you got to this business in particular and healthcare as an industry and all that? Sure. And thanks so much for having me on the podcast. Excited to be here. So I started, like many, in the search ecosystem and finance, did equity research at the Sanford Bernstein, quickly realized that I wanted to do something more operational in nature, moved into an ops role in an outsourcing company, and eventually became a healthcare entrepreneur, founding a VC-backed home healthcare company.

5:14post that, spent some time at Amazon, but really realized that I wanted to get back into operationally focused businesses in the healthcare industry. I am really an operator, you know, through and through and very much enjoy getting up every day and solving operational problems. And that's what led me to search. What did that start to feel like or look like at Amazon and your other career points where you kind of felt the need or like interest in doing something different? Yeah, so I think for me, finance was a little bit too removed from the action. It was a lot of analysis and writing and not enough doing.

5:56And I think at Amazon, there was a lot of doing, but I never really had ownership of the entire picture. And so that's why I wanted to get into a small business in search because for me, I really enjoy owning both the strategy and the execution. And that's why I most enjoy about leading gas to Sun and Spamarka. What attracted you to maybe healthcare generally? Were there a few industries that you kind of were spending some time around and you eventually kind of narrowed your focus? When I raised my fund, I was 100 % focused on buying a healthcare business. And I think for me, there were kind of two key parts of that.

6:40The first was I felt that my background in healthcare entrepreneurship would make me more credible when I talked to sellers. And then I think healthcare is also a great industry for searchers because it is the quintessential Main Street business. So if you think about provider groups, there's thousands of provider groups nationally, and the sellers are very wary of working with private equity. They are the lead clinician in the group typically. And under our structure, they actually have to stay post-apposition for five years. And so they really want to make sure that whoever they partner with is the right partner.

7:22And they're certainly more interested in being the platform than joining a platform. So I think that plays really well to, you know, the search model and searcher strengths. What are some other benefits of just number of targets? Like the fact that there's thousands of similar looking businesses, like as you dove into the industry more and spent more time around it, what were some maybe advantages to just the sheer size of it? Yeah, I mean, as you know, it's very hard to acquire a business. So the more targets I think leads to a higher probability of success. and I think because it's so fragmented has really attracted private equity and the game that they're playing in healthcare is very different than the game we're playing.

8:08So their model really is an M &A model focused on multiple arbitrage. They're trying to buy these really small businesses and aggregate them together into a much larger business that would command a much higher multiple. For us, we're playing a different game in the sense that we're trying to find a single small business that has a lot of the attributes of what a large business needs and then grow it organically. And so I think that's kind of one of the key things in healthcare that's a little bit different than other industries where both of the owner groups that you compete against post-acquisition, so you think clinician-owned groups, the owners tend to run their business, they're the most productive clinician, and they're managing the business in their spare time, and they don't typically have like a dedicated business support team and access to institutional capital.

9:03And, you know, private equity, as we just discussed, is really focused on the M &A play. You know, organic growth is long. It takes a lot of time to come to fruition. It takes a lot of capital, and it's really hard for it to move the needle for their returns. So, Searcher is kind of sitting in this interesting place in between both of those types of owners where, you know, we have the business skills, we have the access to capital, and we have the time to really build a, you know, industry-leading business completely organically. I'm sure over the course of the search to the story you tell to owners about who you are what you're trying to do you know it gets refined and improved and focused after each you know seller meeting were there any key points or key owner discussions or relationships you had where it was kind of the aha moment like okay like here's the kind of niche as a search entrepreneur that I can have in the industry, and maybe here's how I tell that story in a cohesive and clean way.

10:13Yeah, I think the narrative that they are going to retain their clinical independence post-acquisition and that we're going to be able to lead a physician or provider-first organization is something that really resonates with them. Because if you think about it, they are a very different type of seller than the vast majority of orbital market sellers and that they have to stay long-term post-sale and that this is the profession they've trained for decades to be able to practice. And so if they sell their business and have a bad interaction or end up getting let go, they'll probably have to move their family to a different metro area to be able to be outside their non-competent and be able to do their preferred profession.

10:59And so I think the seller-searcher fit is a lot more important in healthcare than it is in other industries where the seller is going to exit the business in six months. Yeah, you mentioned it took a year to officially close the business. And that is a point I hadn't thought about, that the degree of risk for the seller is that much higher due to non-competes and just the dynamic of running a clinic. I think it takes a lot more focus on building trust because this person's along for the ride with you. So they're really a business partner. This is not, they're selling the business and moving on.

11:39What was most helpful in developing that trust? Would you try to, or some like repeated things you try to do or spend time together? What were your focuses? So at the time I was living in Seattle and the, and the business is in the DC area. And so I was flying out here really every month meeting with the seller and trying to kind of understand what his concerns were. And a lot of that, as we kind of already mentioned, was around clinical independence, making sure he gets a fair deal, and really just ensuring that we don't act like every private equity fund that he's ever heard of. And so then we really try to document a lot of that in the transaction documents.

12:20And I think as he got to know me over a year, he got more and more comfortable that we would do what we said we were going to do. I bet it was pretty impactful too, spending in-person time despite being cross-country. I mean, that definitely helps move the needle too. Most definitely. And if you think about provider groups, most of these groups have a large number of sellers, right? So our group, while they had a primary seller, there were five total sellers, and all five sellers are still in the business. And we have a hundred percent retention of not not only the sellers, but all physicians we've hired since.

12:55And I think that really speaks to the fact that we've been able to create a really constructive clinical partnership with them. I imagine that also takes time having that many sellers each who have, you know, they're united around this mission for the business, but there's all these personal dynamics or each one wants something maybe a little bit different that you have to navigate. How did you navigate with that many kind of parties to make sure everyone's going to work in the right direction? Yeah, so we had a lead seller who was the person who founded the business. And then we had the, you know, sellers who are minority shareholders.

13:31And we tried to just have a lot of in-person meetings where we talked about, you know, what the post deal business was going to look like. We can make sure we're all aligned in terms of mission and really demonstrate that we are credible partners and we're going to do what we said we're going to do, which I think is really, really important. I think most providers are very wary of private equity because a lot of private equity funds have come in and asked providers to produce a lot more than they had historically, you know, removed their clinical independence or just were generally not good partners.

14:07You also talked about organic growth being a differentiator as a searcher that PE is probably less interested in. How did you outline your ambition for the business compared to other buyers that they inevitably have run into before and talked to? Yeah, I think we had a little bit of a unique opportunity with this business where this business had grown organically very quickly for a number of years before we acquired it. So they were really comfortable with that playbook. And really the question was, do you subscribe to the playbook and are you going to really build on the great foundation that they've put in place and be a good partner going forward?

14:51And so while I think we've done a lot of different things than they did initially, they had really kind of created the playbook that we're now leveraging. And so it wasn't too hard to sell. But I think the sellers very much understood that they had built something really great that could be a platform and they didn't need to be an add-on to someone else's platform. earlier you mentioned that this being kind of the quintessential mainstream business there's you know providers who are trained medically to do their their role but that are also running a business on the side the number of targets makes it maybe there's more opportunity for you as a searcher to buy a company but on the flip side you also talked about that makes M &A growth.

15:37So once you have the platform doing add-ons, actually a challenge because now there's just different, each clinic is running a different way and there's different cultures to try to combine and work together with. Can you talk about kind of what your strategy with M &A versus organic has been and kind of how you've come to this conclusion? So we focus exclusively on organic growth. And the reason for that is I think M &A and healthcare is really, really difficult to execute. Acquisition multiples are very high. But beyond that, if you look at it, just like you had mentioned, you're really acquiring a group of clinicians.

16:17I mean, it's a business, but it's really a group of clinicians that is practiced independently, done things their own way. And then you're asking them to stay on for five years as part of the deal. And so if you're really executing a exclusively M &A strategy, what you end up with is a, you know, an assortment of a bunch of independent, previously independent physicians that may or may not want to do things your way. I think that's a really tough way to build a business as well as create a consistent patient experience. Our focus has been exclusively on organic growth. And so that's hiring new physicians and setting up new centers.

16:56and we believe that we have a really right to win, to steal the phrase, in that space. And the reason is that no one else is really doing it, right? So those clinician-led groups, with the exception of the group that we partnered with, don't typically have to have any focus on organic growth because they're running those lifestyle business. They don't have access to capital. You know, why take all of that risk to try to grow exponentially? And the private equity guys, as we mentioned before, are really focused on multiple arbitrage, buying businesses and piecing them together and hoping to sell them at a higher multiple.

17:35And organic growth is just not that attractive to them. If you think about the largest player in our space, the 1 ,000 physician group. So to grow by 10 % organically, they would have to add 100 physicians in a year and set up sites for them to practice that. So that's probably not going to move the needle for them. It costs a lot of money and takes a really long time. But for us, hiring 10 physicians in a single year is twice the business we bought and is truly a game changer for us. So we've been extremely focused on organic growth. And I do think there are ways to do it in a very capital efficient manner.

18:11Yeah, I'm excited to get into the capital efficient piece, too. But what drives organic growth? Is it purely, is it a supply-demand imbalance in terms of just the amount of demand for the service is really high? Or is there a, how do you outcompete maybe local clinics in the areas you're expanding into? Maybe talk through kind of what organic growth feels like. Yeah, the nice thing about healthcare is there's far too many patients and not enough providers. So really the key to organic growth is being able to hire clinicians and then in turn set up sites for them to practice that. And the reason that there are just too many patients is in almost every subsector in healthcare, there are some kind of structural challenges in terms of producing enough clinicians to meet the current need.

19:01And so in specialty care, so if you think like production of specialists, there was a government act in the late 90s that capped the number of fellowship seats. So we just don't produce enough ophthalmologists and ENTs and GIs, which means there will always be too many patients. So when we're expanding to a new area, we are not really out competing a local group. We are just pulling off of their backlog. So they have too many patients. There's a weight at every other group. We're going in saying, you know, we can see people a little bit sooner. So that's the unique thing about healthcare. And that is really across subsectors in healthcare.

19:42So be it ABA therapy or PT or specialty care, there's just not enough providers and far too many patients as the population ages and disease incidence increases. So this is really an execution-oriented business. Can you hire people and can you set up new locations? If you do those two things, you can be successful. I want to get into hiring too, but in terms of capital efficiently opening new locations, what goes into a new center in terms of the building or equipment, any licensing or regulatory requirements? What happens when you open a new location? What needs to happen? Yeah, it's a very costly and regulatory intensive build out.

20:31So it takes at least a year and it costs millions of dollars to do. So that is a real no. It's not an easy thing. But there are ways to, you know, reduce your build-out costs by finding sites that have a lot of the attributes you need and trying to repurpose those sites and leverage dollars that your landlord can give you in the form of TI. So an example might be, you know, if you were an ABA company, so that's ABA companies are focused on autism treatment for children, right? Finding what used to be a daycare and repurposing that would save you some on build-out. So, you know, the build-out costs and timelines vary by subsector.

21:12Ours are probably some of the most significant of any subsector in healthcare. But there's, I think, a playbook of, you know, being thoughtful about your real estate strategy, as well as partnering with institutional landlords and give you material, TI, that can allow you to expand in a much more capital-efficient way than just building stuff from scratch. so then real estate becomes a really big part of how you think about expansion and there's a here in portland there's a toys r us that closed recently where i went to high school and it's now a cancer center and it i guess it worked it was a huge parking lot that apparently is very full what kind of centers what buildings tend to work well for your business and what if you're just on google maps or driving around an area what are you kind of looking for and trying to focus on?

22:02We are not a retail business, so it's not like an urgent care where someone needs to be able to see when they drive by and stop and if they're sick. So really anywhere works for us. And we're typically like in office parks, focused on lower cost per square foot and more generous TI packages from those landlords. But as you correctly mentioned, there's a lot of landlords right now that are trying to retrofit their centers from either retail or office, because office has been a really challenged part of real estate due to the work-in-home trend, and are willing to spend the money to transition that to healthcare.

22:43So the nice thing is we are in a very attractive subsector from the landlord's perspective, and so a lot of landlords would want to work with us. I imagine it also helps showing that you haven't closed a clinic. you know the clinics you open stick around for a long time and you intend to be a long-term clinic versus a you know industry or business where maybe it's more volatile and there's more closings that happen too yeah i think health care is a very defensive industry which a lot of landlords like and then i think within health care again it's we occupy a pretty unique place amongst the universe of potential tenants right so we talked about before there's clinician-led groups, and then there's PE.

23:26You know, I think landlords are pretty wary of clinician-led groups because, you know, the solvency of the group is really tied to what happens with that individual clinician. There can be disagreements between clinicians and these groups often fail. And on private equity side, I think, you know, landlords can be pretty wary of private equity too, the feeling being that a lot of private equity platforms have put far too much to it on the business and then really tipped over and had to shut down. We really think about how can we grow in such a way that we can produce very strong returns for our investors, but in a responsible way.

24:01So we're not going out and truly trying to grow exponentially. We're really focused on growing in a measured way. So when we bought the business, we had three surgery centers. We have 10 this year, so five years later, four of which are in flight. So it is a pretty significant percentage growth rate, but it's, you know, from the size of the business perspective, it is a very measured approach. So with any new center, what are the big buckets of cost and where have you found ways to finance them more efficiently? So I don't think we've really figured out a better way to do this in terms of doing it at a much lower cost than others beyond finding facilities that are amenable to a lower build-out cost.

24:49I think what we've been able to do is utilize lenders that I think are not as prevalent in the search ecosystem. So when we started, we started with a typical bank lender, and that really became a rate limiting factor in terms of how fast we could grow. And over time, we've transition to a private credit fund. And that fund really thinks about its willingness to deploy debt in terms of if it will create EV. And that's really how we think as equity investors and owners, right? We're not so concerned about current profitability and coverage ratios. We're much more concerned about what is the amount of EV we're building in this business.

25:30And I think that's really important in healthcare where it can take three or four years for a provider to fully ramp up. Can you talk through that in more depth on why your debt provider views it through enterprise value creation and kind of what that means in practice as you evaluate new location? Sure. So, you know, we're not running the business for distributions right now. We're really trying to reinvest all of the cash flow and growing the enterprise value. And a lot of lenders would not really be comfortable with, you know, depressing EBITDA to create a much larger business. But the lender we work with, and I think a lot of private credit funds have understood that their security is ultimately tied to the size of the business.

26:13It's not tied to coverage ratios so much. And that's important in healthcare because when you set up a new location, it can take a year or two to set it up. Providers, you have to provide often significant guarantees when they join. And there's a really long rent process and significant jQuery for any location. So, you know, you could be building to a business that's two or three times the size you're currently at and have that install base and, you know, a relatively low EBITDA margin as a result. But if everyone understands that the kind of first principles of this industry, that there are far too many patients, if you have the providers and locations, you know, eventually they will ramp up and create a lot of enterprise value for everyone involved.

27:00How predictable has that ramp up been in your new locations? When you talk about that supply-demand imbalance with lenders, does that show through pretty quickly in your ramp up? It's not this five-year process to become profitable. Yeah, no, I think that is a very predictable ramp, and it took us a few years to figure this out. And we've gotten much better at ramping, simulating demand and ramping providers more and more quickly. But I think as that has become a predictable playbook at scale. So, you know, we've added 15 physicians, you know, as of this year, since we joined, I think people get more and more comfortable with the, what, you know, the ramp timeline and what those dynamics look like and what the ultimate enterprise value you're creating is.

27:51So, you know, this is a learned playbook. It's not something you're going to come in and, you know, immediately two or three exercise your business from a capacity standpoint. It's, you know, our first year we hired one physician and saw how it went. And then, you know, we hired three the second year and went from there. And the business had a strong history of doing this themselves. You know, the business was founded by Dr. Rai. He was, you know, part of the GI program at Hopkins. he left, started this business, and then went through a period when he decided to go organically, he added one physician a year and ramped them up.

28:23So we could look at that data and see his track record of ramping physicians, and then think about if we had a dedicated person and business team working on this, maybe we could do it slightly faster. And then you kind of mentioned this with hiring the right talent. Once you have a new location planned or in process? And what does it take to hire the right talent for a location? Maybe how do you evaluate if this doctor is, there's like the provider side and there's the business, maybe manager side. How do you hire for both? Does the provider do both or is there a separate role for business manager?

29:07How do you think about the talent side of a new location? I think the key to being a good partner to the physicians, and again, we don't directly on the group. We are a service provider to the group, and we can talk about that in a little bit. But, you know, really how we think about it is we want to solve everything for them. So they just have to practice medicine. So we do all of the business side of things. You know, we take care of the center. We set it up. We ramp it up. We think about marketing. So we're really providing a holistic solution where they just need to practice medicine. And I think that combined with we are able to offer a better quality of life to clinicians, so a really predictable schedule.

29:48It's effectively a 100 % outpatient job. You don't really need to go to the hospital. And people are able to live in very aspirational locations. So, you know, we started off in D.C. We've since launched in Philly as well as Northern Virginia. Those are places people want to work at. So if you think, you know, how physicians evaluate opportunities, it's very much the same way that we would, which is, you know, can I live somewhere I want to live? Can I have a good quality of life and work-life balance? And can I have a good compensation package? and because we're in desirable locations, we really focus on quality of life and work-life balance and then pair that with an organization that's completely built around the physician.

30:32That allows them to be more productive and in healthcare, you get paid per piece, which means you can do more pieces during your eight hours that you're at work and in turn, make more money. And so I think the value prop that we're offering is not materially different than the value prop that you and I would want if we want an interview for a job. It's just that I don't think most healthcare systems or private equity platforms are thinking about it that way, where this is a physician-led organization and the physicians are our partners. And we're really trying to think about every day, how do we make their life better?

31:05And I can think if you're able to do that, that really comes through during the recruiting process. You also mentioned retention had been really good and you hadn't lost a provider to this point. What goes into that? There's the, getting them hired is great, but what keeps them engaged and retained in the business? What makes them excited to continue? Yeah. So maybe it gets back to the, are you a good partner or not? And we really focus every day on how can we be a good partner? And so clinicians want a lot of independence and be able to practice with a like-minded group of clinicians that are really focused on high quality of care.

31:45And so I think we're able to do that internally and inculcate that sense of clinical excellence, but they don't want to do anything beyond that. So they're really not interested in running the day-to-day business, but they want to be able to be stakeholders and provide input on that. Because it's very hard for us to understand as business people how things work on a daily basis and what are the clinical implications of a business decision. So we really focus on always seeking physician input on any business decision we're going to make and ensuring that they don't have to do any of the business responsibilities.

32:21So it is really run as a partnership between Dr. I and myself and the original sellers and the new physicians as well and myself. And we always have this iterative process where we're trying to figure out ways to do it better. I don't think that a lot of the private equity funds or hospital systems are so focused on physician happiness, retention, and just treating them as true partners. And I think that shows through when we recruit people as well as in our attention metrics. What did their role in day-to-day look like when you bought the business? And what were some things you started working on and prioritizing to improve their day-to-day life and give them more time to work with patients versus make business decisions?

33:08What were the first things you worked on in the business after you acquired it? So the first things we worked on were thinking about how to streamline operations. So how can we, for example, scope more patients and utilize the endo time more efficiently? So endo time is our surgery center time. And really, if you're a GI, you want to scope patients. That's what you've trained to do. And scoping patients is performing colonoscopies or GDs. And so we really thought about how can we see more patients more efficiently in the endo centers? How can we do a better job of marketing the physician's practices and ensuring that they have plenty of patients every day?

33:52And then we also thought about how can we reduce the operational overhead that these guys had to deal with as business owners. So we really, from day one, took over all of the business components of the group and run those to this day. And we have the physicians be subject matter experts that we run ideas by and get their feedback on in a very iterative process. But we're actually the ones doing all of the heavy lifting. whereas before particularly the seller Dr. I the primary seller you know he was doing all of this on his in his spare time and not just a lot to be the most productive physician in the group as well as you know one of business on the side.

34:32What felt like the biggest learning curve for you as CEO? I think for me it was really learning the industry. I don't think healthcare is that much different at its most basic from really any other kind of operationally intensive business. And I really love running operationally intensive businesses. But this is a very complex industry. There's a lot of specificity that you're never willing to be able to understand if you didn't go to medical school. And so a lot of it was just being curious and spending time with the sellers and asking questions about how things work. And I think being willing to admit that you're a novice and that, you know, it's going to take a long time for you to get dangerous in this space.

35:16Do you have any family members in healthcare or relatives or close friends you could kind of bounce questions off of as you got up to speed? Not really. This was really learning from scratch. And, you know, when you're building a sim, you know, you have some rudimentary understanding of an industry, but obviously being in the seat is materially different. And so I think what's important, the advice I would impart to other search CEOs or people that are searching in the industry is just that humility to be kind of say, like, I don't know what the answer is or I don't understand and kind of seek out those right answers from the seller group is really, really important.

35:56And I think it speaks to the fact that you need to have good partners and you need to partner with good people, right? Because these businesses are not businesses that a searcher with background in finance operations can run without a friendly seller partner who's willing to be a true business partner and be engaged for years. I mean, the really great thing about this group is a wonderful group of people. We have a great relationship with everyone in the group five years later and have built something really great together. And I think they all feel that sense of ownership and accomplishment. And I think that is not a normal search outcome.

36:41I think a lot of times, you know, sellers are not in it for the long term or, you know, relationships fray. I just feel very thankful that we've been able to find a really great group of people that is excited to work together and have been great partners. As you talk to providers and other businesses, were there kind of green lights or yellow lights that you would pick up on over time that could tell you more about how they view your business or you as a potential partner to kind of evaluate who the right fit for you would be? Yeah, I think I was looking for a fellow entrepreneur. So someone who was business savvy as well as an outstanding clinician.

37:22I think that's what I found. So Peter Dr. I is, I think, one of the preeminent GIs in the area, but also a really thoughtful business person. And that's what I was looking for. where a lot of sellers felt like they couldn't really understand the value proposition that we brought versus private equity, or they were looking to just retire and leave the business. And that's not what you want. You want someone who's going to stick around and build the business with you and be a true business partner. And I don't think this would have been possible without such a friendly group of clinicians that really wanted to help build the business long term.

37:59And I think it's often said that the most common, you know, all things being equal, the most important metric in a business acquisition is terminal year growth rate. And this business grew 40 % in its last year. And I like to joke with the sellers that, you know, they were doing it part-time and have grown faster in that last year than we have grown any year since we bought the business. So I just think it speaks to the fact that, you know, growth rates say a lot. You can do a lot of analysis, but ultimately it's very hard to argue with results. And these guys created a really great, you know, really great organic growth machine within the structural limitations they had of, you know, not having access to institutional capital, having to PG everything, you know, running it in your spare time.

38:52And so we've really just kind of come in and been partners where we've taken a lot of that playbook, refined it, and tried to do it at a greater scale. What are you most excited to see in the next two or three years? And what stops you getting there? So we recently launched in the Philly area and are launching Northern Virginia later this year. And so we have pivoted from Gastro Center of Maryland to Gastro Centers of America, where we are setting up sister groups in these different states and really trying to see how modular the model actually is. And, you know, this is something that I don't think there's been precedent for, at least in our specialty.

39:36And I think it goes back to what we had talked about before, which is searchers occupy a very unique space in healthcare between clinician-led groups and private equity groups and just benefit from different incentives, right? For us to grow over, you've been doing this for five years, another five years, and if we can grow across a bunch of different states and, you know, two or three X the business from where it is currently, that would be a really great outcome for us, but probably not move the needle for a private equity shop or, you know, it's not really in the wheelhouse of a clinician-led group.

40:10And so we're continuing to try to lean into this organic growth play and see, you know, can we go from the 20 physicians we're at today to 40 to 60 physicians in the next few years across these different states. Thinking about your healthcare search again, knowing what you know now from executing your own playbook and refining it, what other areas of healthcare stand out where there's kind of similar dynamics that you could build a business around successfully? It's a great question. I think we spent a bunch of time talking about how great organic growth is in specialty care. But I actually think if you look at healthcare as a continuum, it's actually the hardest to implement in specialty care.

40:54Whereas I think there's a lot of subsectors that if I were searching again, I would focus on. And there's really kind of three that stand out. So the first is ABA therapy. This is a kind of perennial favorite of search funds. to focus on, you know, autism therapy for kids. But what's really great about it is you benefit from the same supply-demand mismatch you have in specialty care and throughout healthcare. It's highly recurring revenue. So the kids are typically enrolled for 20 or 40 hours a week, and each kid's worth, say,$150 ,000 to$200 ,000 in recurring revenue. And it's a relatively simple business.

41:34You're setting up what are effectively child care centers with behavioral RBT's and BCBA's, which are master level behavioral experts. And so those, what's the great thing about that business is, is you can truly grow exponentially and it's essentially almost contractually recurring revenue. So I think that is probably the best place to focus if you're really excited about organic growth in this space. And it was the same case when I was researching and an area I had focused on as well. I think the second area that's really interesting is ambulatory infusion centers. And what ambulatory infusion centers are is, historically, if you wanted an infusion, you go to a hospital.

42:21And infusion's a drug that you are having put in your veins via an IV for a very specific issue. So it might be a GI issue, it could be a rheumatology issue, et cetera. And they're very high value drugs, you know,$5 ,000,$10 ,000,$20 ,000 drugs. And historically, you had to go to a hospital to do that, or you had to go to a physician group. And a lot of physician groups have moved away from doing infusions because it's a very high working capital business and reimbursements can be challenging. There's been a new development in healthcare where people are setting up what's called ambulatory infusion centers, which are these third-party infusion centers that are set up typically like in a strip mall.

43:03And you can go there and get infused for everything from, you know, like an iron supplement up to, you know, very specific specialty drugs that cost$25 ,000. And they're able to benefit from better contracts because they are set up not as a physician group, but actually as a infusion business. And similarly to ABA therapy businesses, these are very simple businesses. They're set up in strip malls typically. They have overseen by nurse practitioners and not physicians. Most of the work's really done by registered nurses. And so Sunny Apple Center is very capital light and very scalable. So you can really exponentially grow in the space if you're able to do it.

43:50in a very capital-efficient way and are thoughtful about working capital. And then I think the third is really behavioral health more generally. I think there's a pretty interesting opportunity in specialized therapy, so kind of talk therapy. And to some degree, there is an opportunity in addiction treatment or recovery, but there tends to be a lot of regulatory issues there. So I think those are all really interesting subsectors in healthcare that I would focus on if I was searching again with an emphasis on provider-led businesses. Is there a lot of people looking in those spaces, or does it feel still pretty nascent in search?

44:31I think that there's historically been a decent number of deals in ABA therapy, but I think there's still a huge amount of white space beyond, even with all the kind of payer blowback that's happened recently, there's just such an increase in the prevalence of kids with autism that someone needs to take care of. And I think there's been very little focus historically on ambulatory infusion centers as well as behavioral health. So I think both of those are really interesting opportunities for searchers coming in that want to kind of find the next big thing to focus on. And timing's really important in healthcare.

45:09So if you look at, even in specialty here, there tend to be waves. So like dental care was the first to be rolled up. you know, GI, dermatology, we're kind of second and are the most mature. So really making sure that you're entering at a time when private equity is kind of just starting to get interested in that space and there are significant white space is really important from an exit perspective. Any closing piece of advice if searchers pursue one of those three, kind of what to look for and pay attention to or focus on or avoid? I think similarly to in specialty care, you're really looking for a very strong selling clinician that can be your partner.

45:57That is very hard to replicate post-transaction. And so if you kind of partner with the wrong person, it can be almost an immediate deal killer. So I think you have to diligence out the quality of the people you are partnering with in a healthcare business much more so than you do in a traditional business. And I think the second thing is these are highly local businesses. So the state you're in matters a lot in terms of regulations, but also how favorable reimbursements are, how scalable the business is. Are there going to be future restrictions on corporate ownership, PE ownership of healthcare businesses?

46:39So I think it's not, the opportunity is great nationwide, but there are certainly pockets that are better than others. I love it. Well, Zach, thank you for coming on the podcast. It's been a ton of fun and I appreciate you sharing more on the episode. Where can people kind of reach out to you if they want to chat more, hear more about what you're working on? Yeah, thanks so much for having me and I'm always happy to chat with people. Please hit me up on LinkedIn. Perfect. Awesome. Thank you, Zach. Thanks so much, Alex. Appreciate it.

47:16Thank you for listening. I hope you enjoyed today's episode of Think Like an Owner. If you enjoyed the show, please consider leaving us a review and telling a friend to help more folks find Think Like an Owner. For full episode transcripts in our weekly newsletter, please visit our website at tlaopodcast.com.